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Apple Too Big For the Dow Jones Industrial Average
An anonymous reader writes "Apple is clearly the hottest tech stock on the market right now and the company is clearly at the vanguard of technological innovation. Consequently, many have wondered why Apple isn't part of the Dow Jones Industrial Average (DJIA). As it turns out, Apple's astronomical share price effectively prohibits the company from joining the DJIA as it would disproportionately influence the index."
The only people who really pay attention to the Dow are the talking heads. The money runners look at the S&P 500 when benchmarking market returns.
The Dow is an archaic measure that for some reason sticks around.... tradition?
*Shrugs*
So? If they want to be in the Dow they can run a few stock splits.
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
So they don't want to split their stock - that's a horrible thing now? The trades are too granular now?
If it's really a problem, get enough of your fellow traders together, make a giant offer to buy Apple, then set the prices what you want them to be. Business decisions are made for worse reasons, I guess.
Why is this a story?
Ryan Fenton
Dow Jones Industrial Average (DOJA)
Reasonably sure that no one in the world abbreviates it like that. In fact, Googling "dow jones" and "doja" together, brings up... This exact news story. And no others.
DRM: Terminator crops for your mind!
It is white collar gambling and no more about company valuations than Full Tilt was about legit poker playing. Sure you can make money if you're smart/lucky/know the right people/have the right fiber connection/have the best and brightest market manipulation master from the major STEM universities, but other than that the house is stacked against you. The distribution of wealth in the country (and world for that matter) among individuals is reflective of those at the top of the game rigging it to their advantage, politically, technologically, and otherwise.
Or am I just another FUD spewing pinko-commie?
'We are trying to prove ourselves wrong as quickly as possible, because only in that way can we find progress.' RPF
They have $69 Billion in equity, $23 billion in annual income (generously taking the four most recent quarters), and market cap of 382 Billion. That means it would take 13.6 years of income, at present rates (which are MUCH higher than historical rates) to break even. Around 207-230 Billion would be a fairly safe price, assuming they can keep up this level of income--and is a tad under 60% of their current market value.
They're not overvalued by 30x -- that would imply they were worth $12 billion, and their equity alone is better than five times that. But they are overvalued by at least 20-30% from the standpoint of a prudent investor.
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
Although come to think of it, being overpriced has never bothered Apple in the past. :)
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
The Dow Jones is an older index in which each company's weight in the index is determined by its stock price. In more recent indicies like the S&P500, stocks are weighted by market capitalization. Assigning weights by stock price is silly because it makes no intuitive sense and means extra work is needed to prevent events like stock splits from moving the index around.
So anyway, this isn't really about Apple, it's just a technical detail about a legacy index. Apple's share price is high ($412 as I type this), but so are plenty of other companies like Google ($539) and Berkshire Hathaway ($101250!).
Patience. All good things take time.
Congratulations. You've just discovered why there are dozens of S&P 500-based mutual funds, but there aren't really any DJIA mutual funds.
The World Wide Web is dying. Soon, we shall have only the Internet.
The index is too narrow. S&P 500 and Russel 2000 have much better coverage of broad economy. Not coincidentally S&P500 and Russel2K ETFs, futures, and options are among most traded on capital markets.
The publisher of the index, Dow Jones agency also owns Wall Street Journal and that maybe why DJIA is not forgotten just yet.
Um, I've got some news for you...
Apple has a market cap of $382 billion and $70 billion in net asset value, so even if they appointed a no-talent ass clown like Michael Dell as CEO and he immediately liquidated everything, they're less than 6x overpriced.
Do you even lift?
These aren't the 'roids you're looking for.
Do they know what an "average' is?
Do you?
The (arithmetic) mean, which is probably what you're thinking of, is only one type of average: mean, median, harmonic mean, etc. The Dow Jones is a weighted mean; weights can be calculated in such a way as to minimize the effects of outliers. If there's a problem, it's with the way they calculate the weights, not with the concept of an "average" in general.
The correlation between ignorance of statistics and using "correlation is not causation" as an argument is close to 1.
Out of curiosity, why should Apple split the stock? Their revenues aren't impacted by their valuation, and by keeping the price high they're deterring the day traders. Only serious institutional investors will be willing to buy the stock, and they're more likely to hold it long term, making it much more stable. Day traders and speculators tend to make a company's market cap gyrate wildly since so many of them base their stock picks on hearsay, gut feelings, the phase of the moon etc. The only reason they'd have to split the stock is because they have a burning desire to be on the Dow, which is a pretty piss poor reason in my opinion.
My eldest brother is the majority shareholder of a privately-held financial company, and over the years he's been bombarded with queries about when he's offering an IPO. His answer? "Never. I refuse to have the stock price of my company set by know-nothing day traders. They're busy watching the fluctuations on the scoreboard, not the developments on the field."
The Dow Jones is not exactly a price weighted average.
When it first started it was. They averaged 12 stocks and there you go. No fancy market cap calculations. (Or course, back then it was hard to figure out a companies market cap, but that is something else.)
Then, as stocks issued dividends, spit, and companies were replaced, Dow switched over to weighing each stock price with a factor. So, it does not matter how high Apple's price is when it introduced into the Dow, it's stock will be given a factor that will make the change invisible. For the first few months, a 5% change in Apple's price will basic the same influence as any other company - kind of. Of course, as time goes on, the "winners" (i.e. those who have been around a long time and have had a large price increase) will tend to dominate. But that would come latter.
The Dow is a poor index. It was great when you had to calculate a index in a hour and all you had was pencil and paper - it's simple. However, as soon as people got a second rate spreadsheet they could do something better - like the market cap weighted S&P. (Well, mostly market cap - they adjust for float). The one good thing you can say is that it's been around forever so you got a lot of data to work with. The S&P has been around for only 1/2 as long.
Are we only in a recession because companies who are going to say we're in a recession are allowed to be counted in the DJIA?
No. The DJIA and S&P 500 track each other pretty well over the long term. Look.
.sig withheld by request
there aren't really any DJIA mutual funds.
There is DIAMONDS (DIA), a SPDR exchange traded fund that tries to track the DJIA.
Actually I typo'd now, meant to type not. Slashdot is my doja, I guess I get a high from being here and it messes with the typing.
Apple has been trading below-value for a long time now. People see the high per-share price and aren't sophisticated enough to know that the share price is simply the result of a division problem involving market cap and shares outstanding, and thus believe stocks that have a high share price are automatically "expensive" stocks when they may be cheap (as with Apple based on earnings and earnings growth), versus a low per-share price that is very expensive (as with Sirius/XM with a $2 share price but not enough earnings to justify that price).
Title:
Apple Too Big For the Dow Jones Industrial Average
TFA:
Apple, trading at about $420, would have the largest weighting in the 30-company measure because Dow companies are ranked by stock price, not market value.
Apple is not too big for the DJIA, it just has a ridiculously high stock price. On its own this is meaningless. The basic formula for stock price is market capitalisation (company size in dollars) divided by number of shares in circulation, which means that a company can increase their stock price without increasing company size simply by reducing the number of shares in circulation. Don't you love financial illiteracy?
"The most dangerous enemy of a better solution is an existing codebase that is just good enough." -- Eric S. Raymond
There's something to be said for having a high share price if the company is big and successful- those who tend to buy tend to hold on to it for a long period of time ...
I don't buy that. People tend to think in terms of a dollar amount. If a stock is $40 rather than $400 they just buy ten times as many shares. Letting your stock go up into the hundreds without splitting is just a vanity thing, a PR thing. The behavior you allude to may have some validity with a Berkshire Hathaway share at $100,000 but not something with a share price of $400. The little guy can still buy a single share at $400, unlike $100,000.
... and the day to day operations of the company are directed toward a long-term profit mindset.
This has nothing to do with Apple's share price. It has everything to do with the perspective of management. Apple with a 10:1 split and a share price of $40 rather than the current $400 would be run exactly the same give the leadership of Job's and his hand picked proteges.
When a company is traded constantly and when shareholders are only buying it to look for a short to medium term profit (like a year or two) then they don't are how the company performs down the road, and the board will reflect that, making decisions that make money now but could cost the company everything long term as they didn't invest in the long term.
Even with Apple's high share prices of recent years people are not holding onto Apple shares. It is constantly being bought and sold depending upon the news of the day (especially Apple news events - Apple shares are notorious for this), people's perception of whether Apple is currently at a local minima or maxima, etc. Those that are holding on to Apple are doing so because of the expectation of revenue growth as the expected new products and services are rolled out. Again, "holding on" is not tied to the calendar as you suggest, rather news and expectations, for example sales look to be on track through the end of the year.
Sure, their income is higher than historical rates - that in no way precludes their income going even higher. Remember that they're doing this in a recession - when we come out of this recession in 2 or 4 or 8 years, who knows how much money people will throw to get the latest iphone and/or ipad?
Investors are simply betting on that eventuality. Of course, if that was a certainty, the price would no doubt be even higher than it is.
My point is, it's ridiculous to say they're overvalued by a factor of 30, but even to say that they're overvalued by 20-30% is just an opinion. You could be wrong, you could be right. If you're so sure about the overvaluation, feel free to short the stock and make tons of money when it tumbles.
The stock is worth exactly what people are willing to pay for it at any given moment. No more, no less. I seem to recall a lot of people calling Google overvalued by rather large numbers when it first went public, too.
I've learned that they're worthless, so I don't read AC comments anymore.